2009 Predictions: How Are We Doing?

It’s only been six months, but it seems like ages since 2008 finally gave way to 2009. Though uncertainty will always be part and parcel of economics and finance, it’s hard to remember a time when there was less clarity in global economics. By January, trillions of dollars of wealth had been wiped out by the global financial crisis that began in September; once powerful banks, investment banks and insurance companies the world over had been reduced to financial cripples; General Motors and Chrysler teetered on the verge of collapse; a young, new president was taking office in the United States; and China, the economic miracle of the past thirty years, saw its economic growth rate cut almost in half from a peak of 13 percent in 2007.

Against this backdrop of uncertainty, MTD made its predictions for 2009 on January 2nd.
Here is what we said:

  1. China’s economy will turn up in the second quarter.
  2. China’s GDP growth will fall below 8 percent.
  3. The Shanghai Index will close above 3,000.
  4. The yuan will remain at approximately 6.8 to the dollar.
  5. The relationship between the Obama administration and China will be benign.

Now that we’ve reached the halfway mark, how are we doing? A review of events so far in 2009 suggests that, so far at least, we’re on target.

China’s Economy: All indications are that China’s economy is indeed recovering, with a sharp increase in bank loans serving as the major catalyst to date. PMI in both manufactured goods and services have moved into positive territory, and anecdotal evidence of a recovery is mounting. After a slow start in the first quarter, for example, vehicle sales increased 31 percent in April and 39 percent in May.

In a recent report, Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets, all but declared victory when he noted:

The shape of China’s economic recovery is reflected in the shape of the CLSA China manufacturing PMI: ‘V’.  For both GDP and the PMI, the right side of the ‘V’ will not rise as high as the left side, but it is now safe to say that a sustainable recovery is well underway in China.

GDP Growth in 2009: According to official data, China’s GDP expanded by 6.1 percent in the first quarter, 4.5 percentage points lower than the first quarter of 2008 and down 0.7 percentage points from the previous quarter. When MTD made its predictions, the World Bank was on record as predicting 7.5 percent growth for China in 2009, one-half percentage point below China’s official estimate of 8 percent.

Despite being positive on the Chinese economy overall, only a very sharp recovery in the final quarters of the year can overcome a weak first quarter, which is why I concurred with the World Bank’s slightly lower number. Since then, the World Bank lowered its estimate to 6.5 percent in March, but in a more recent revision, raised it to 7.2 percent. We’ll have to wait and see how the rest of the year plays out.

Shanghai Index: The Shanghai Index began the year at 1821 and has been moving steadily higher ever since. On June 30, the index closed just below the 3000 mark at 2959, but then passed it on July 1 when it reached 3008, a stunning 65 percent increase since the beginning of the year. Barring a significant reversal in the next six months, this prediction is in the bag.

Exchange Rate: Based on the belief that China had no incentive to cause the exchange rate between the yuan and the US dollar to move in either direction in 2009—a weaker yuan wouldn’t do much to reverse export declines caused by weak demand in the West and would likely lead to trade tensions, while a stronger yuan would only risk hurting exports further—I predicted that the exchange rate would be stable at 6.8 yuan to one US dollar. So far, that’s where it’s stayed.

Relationship With Obama: Not wanting to risk aggravating its largest investor, the United States and the Obama administration have cooled the China rhetoric. Secretary of State Hillary Clinton and Speaker of the House Nancy Pelosi left their human rights criticisms of China in Washington, speaking instead of closer cooperation with China on a broad agenda when they visited Beijing. Likewise, Secretary of State Timothy Geithner confined his tough talk on China as a currency manipulator to testimony before congress. We’ll see how their boss President Obama plays it when he comes to China later in the year.

By and large, I’m pretty pleased with how we’ve done in predicting how events would play out in China this year.

In all fairness to MTD readers, though, I have to admit that my biggest mistake was in not making a prediction that I wanted to add as #6—that the Pittsburgh Steelers would be the Super Bowl Champions in 2009. By January 2, the Steelers had already secured a playoff berth, but faced tough matches ahead against the San Diego Chargers and an always tough Baltimore Ravens. In matters regarding the Steelers, I am admittedly prone to reason with my heart, not my head. Knowing this, I deferred to the advice of those more knowledgeable, and less emotional, than me and did not make the call. The Steelers call not made will be the one that got away in 2009!

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